Phillips 66 (PSX) delivered a surprising first-quarter adjusted profit on Wednesday, defying analyst expectations of a loss and sending its stock up more than 6% in mid-day trading. The Houston-based refiner reported adjusted earnings of $200 million, or $0.49 per share, significantly outpacing the average analyst forecast of a $0.40 per share loss, according to LSEG data.
Strong Refining Margins Drive Performance
The company's strong performance was fueled by robust refining margins and high plant utilization. Phillips 66's realized refining margin surged to $10.11 per barrel, up from $6.81 a year earlier, as tight fuel markets and geopolitical disruptions boosted demand for American fuel exports. The 3-2-1 crack spread, a key measure of refining profitability, jumped approximately 73% on average in the first quarter compared to the same period last year.
The refining segment swung from a $937 million loss to an adjusted profit of $208 million, reflecting the favorable market conditions. The company's refining capture rate was described as "much stronger than expected" by Raymond James analyst Justin Jenkins, who cited commercial moves, favorable product differentials, and inventory impacts.
Hedge Losses Offset by Operational Strength
While the headline earnings beat was impressive, it masked significant noise from hedging activities. Phillips 66 recorded $839 million in mark-to-market losses on short derivatives used as economic hedges against price swings. Under mark-to-market accounting, these contracts are revalued at current market prices, creating paper losses even as the underlying physical barrels gain value.
Operationally, the company ran its refineries at 95% of crude capacity, with clean product yield at 87%. The company also expanded its natural gas liquids infrastructure, increasing Sweeny's fractionation capacity by 23% and boosting Freeport LPG export dock volume by 15%.
UK Expansion and Market Position
Phillips 66 is strengthening its international footprint. On Tuesday, its British subsidiary completed the acquisition of Lindsey Oil Refinery assets and related infrastructure, following a deal signed in January. The company plans to use some of these assets to enhance its Humber Refinery, bolstering the UK's fuel supply and energy infrastructure, according to UK lead executive Paul Fursey.
The company now stands alongside Valero Energy (VLO) and Marathon Petroleum (MPC) as beneficiaries of strong refining margins. Shares of all three refiners have surged over 20% year-to-date, according to Reuters.
Outlook and Demand Concerns
Despite the positive results, there are potential headwinds. Average U.S. gasoline prices reached $4.18 per gallon on Tuesday, the highest level in nearly four years, as supply tightened and unexpected refinery outages occurred. If pump prices remain elevated, consumer demand could soften.
Phillips 66 executives expressed confidence in the company's position. Brian Mandell, who oversees marketing and commercial operations, highlighted robust refinery activity and solid consumer demand, noting that only 1% of the company's crude supply comes from the Middle East. "We are in a very, very good position," Mandell said.
